Riksbank leaves base rate unchanged

Sweden's Riksbank has left the main repo rate unchanged at 2 percent and has delayed any rises well into 2012, meeting market expectations.

Riksbank leaves base rate unchanged

“The difficulties in resolving the public finance crisis in Europe has led to increased uncertainty regarding the future. In Sweden, growth is expected to be slightly weaker in the coming period,” the bank wrote in its decision.

The bank furthermore deemed inflationary pressure to be sufficiently low to support leaving the rate unchanged.

The Riksbank expects the repo rate to be an average of 2.2 percent during 2012, down on a previous forecast of 2.4 percent. For 2013 the bank cut its forecast from 2.9 percent to 2.7 percent.

The bank expects “unease abroad” to subdue the Swedish economy in the near future.

“The difficulties in creating a long-term solution to the public finance problems in both the United States and the euro area have increased uncertainty regarding the future,” the bank wrote.

“The fiscal policy tightening will dampen economic growth in the United States and the euro area in the coming years.”

The bank’s decision was expected with all eighteen analysts in a Reuters survey last week counted on the repo rate remaining unchanged. 15 of 16 expected the Riksbank to cut the forecast for how the repo rate would develop.

The bank underlined that there was “great uncertainty over economic developments” explaining that new information may lead to a reassessment of interest rate forecasts.

One of the alternative scenarios under consideration is that the financial turmoil will calm down sooner than expected and lead to swifter recovery in the eurozone, raising the prospect of higher base rates in Sweden.

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Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”